March 2002, Volume II, Issue 3
George Cole Scott, Editor

Interview with Russell Cleveland, President and CEO
of Renaissance Capital

Renaissance Capital Growth & Income Fund III, Inc., (RENN-OTC) is a publicly traded Business Development Company. It trades as a closed-end fund under the Investment Company Act of 1940 and is listed on NASDAQ with the symbol RENN. The fund plans to become listed on the New York or American Stock Exchange later this year. RENN invests primarily for capital appreciation in a diversified portfolio of small growth companies. It uses private placements in convertible securities emphasizing direct investments in emerging growth companies. The investments held by the fund are generally instruments having 5-7 year terms that are typically convertible into the common stock of the issuer at a set conversion price.

Russell Cleveland, President and Chief Executive Officer of the fund, defines the objectives of the fund as "Finding Value, Adding Value and Realizing Value." He is also one of the larger shareholders, holding approximately 5% of the shares. RENN is designed for a holding period of five years or more, with minimal trading contemplated for portfolio holdings. Renaissance Capital Group, the investment advisor, was established in 1973. RENN III was formed in December of 1994 and began trading on NASDAQ in April of 1996. RENN pays out all its capital gains to shareholders, as it must do as a regulated investment company. RENN pays a yearly fee of 1.75% to its advisor as well as performance fees when capital gains are taken. The advisor also manages two other public funds, which trade on the London Stock Exchange.

Investment Performance Since Inception

RENN reported a Net Asset Value (NAV) return of +20.76% in 2001, while the Total Market Return for 2001 was +19.70%. Previous NAV and Market Returns are as follows (all return computations, including returns for 2001, were provided by Lipper Analytical or Bloomberg):

	Net Asset Value Return	Total Market Price Return
3-Year Cumulative	78.6%	116.46%
3-Year Average Annual Return	21.3%	29.4%
5-Year Cumulative	96.1%	149.96%
5-Year Average Annual Return	14.1%	20.1%

We interviewed Russell Cleveland, Chairman on February 28, 2002.

Scott: First of all, I want to congratulate you on joining the Closed-End Fund Association. We look forward to seeing you at the annual meeting. It is important to meet with other members of the closed-end fund community.

Cleveland: Yes. On your suggestion, we are planning to apply for listing on the New York or American Stock Exchange soon. We have just been waiting to get our ducks in a row. Hopefully, that will end the large spread between the bid and ask prices. One of the ongoing debates we have is our dividend policy, which you suggested was important. We are looking into a managed distribution of our capital gains on a regular basis.

Scott: Good. And listing the shares is also good because of the difficulty in buying the shares with the spread in the OTC market. You will also get some questions at the CEFA annual meeting on the structural differences between a Business Development Company and closed-end funds. We can't invest more than 5% in any one company. How do your rules differ?

Cleveland: Under our prospectus and BDC rules, we can invest as much as 20% in one company. We don't do that but we have a lot of investments over 5%. We can also serve on the Board of Directors of portfolio companies.

Scott: What is your basic portfolio strategy?

Cleveland: In the private placement area, we have two basic strategies: The first is to do a number of syndicated smaller deals, say $300,000 to $500,000. In these, we will not be active at the board level. If the company is successful, we can still realize significant gains. The next type of investment is much larger and we will be more active investors ... possibly joining the Board of Directors.

Scott: Your fee structure is also are higher than those on closed-end funds. How do you answer this question?

Cleveland: You have got to compare me to my peer group. Other BDC's fees range from 2.5% to 3.6%. RENN is 1.75%. Our expense ratio is also way below the others. When you look at total return, we certainly do better than most other closed-end funds. We charge more but are delivering more.

Scott: I know something about your background from the consulting we did for your funds. Would you tell us something about how you decided to start Renaissance Capital?

Cleveland: The company was started in 1972-73 so we have been in business 30 years, a long time in this world. After graduating from The Wharton School of Business, University of Pennsylvania in 1961, I was always in security analysis and have held the Chartered Financial Analyst (CFA) designation since 1971. In the 1960s I was intrigued with investing in smaller companies. If you hit it right this is where the big gains are made. McDonalds, Microsoft and others were at one time all small companies. The idea was to try to find something small that grows into something larger. The great gains are made by staying with them for long periods. That is a lot easier said then done. I was particularly interested in smaller companies particularly in those that were orphans--companies that had gone public and were forgotten about when stocks were way down but still had good value. I found in this area you have the best risk/reward.

Scott: Weren't you in the brokerage business prior to starting the funds?

Cleveland: Yes, I got into small companies doing research for regional brokerage firms. I was head of research at several regional brokerage firms. This got me interested in managing funds. The first ones we did in the early 1970s were private partnerships of a modest size with very few wealthy individuals. We did very well with these funds, but we always said we were playing very good minor league ball and winning most of the games we played. Beginning in the late 1980s we began to think of public funds and larger funds. We launched our first public fund in 1994. This was Renaissance III, RENN, one of three funds we manage currently.

Scott: So you started with Microcap companies and moved to small cap and larger companies?

Cleveland: No, never large companies. Microcap is a very recent term; I prefer the term "emerging growth companies". Micro and SmallCap are terms that have been around only for the last four or five years.

Scott: We are familiar with the Royce funds, which use these definitions. About how many emerging growth companies have you invested in since RENN was founded?

Cleveland: If you mean RENN, remember, we have a number of different funds. I don't have the exact number but it is in excess of 40.

Scott: One of your reports says you screen as many as 500 companies when you are looking for candidates. What kind of due diligence do you use to evaluate the managements?

Cleveland: This is where our backgrounds come in. First of all, our main criteria is what companies are profitable and what I call "what is " situations, opposed to "what if." By that I mean we are not in venture capital and we are really interested in a company that is already a proven business. That is the first criteria. Secondly, we try to find companies in which the management, particularly the CEO, has a large stake. If you look at the history of finance, you will find that most of the great winners were basically entrepreneurial companies, for example, Microsoft, or Wal-Mart.

Scott: Once you find a candidate, how do you decide to invest in it?

Cleveland: Let's start with management. We are looking for a CEO who is a big owner of the business and a company that has a growth opportunity — where we see a company that can be very substantial, and, second, does it have a very large market place. Third, does the company itself sell at reasonable values? By that I mean, if I were a businessman, is this is a Warren Buffet kind of deal? We multiply the price of the stock by what we think the stock will be worth, or a price I would pay if I were buying the whole company. That is always a good test, and, if you applied it, you would have missed all the Internet silliness right off. By a reasonable price, we mean if the growth rate is 15% a year, and we can buy it somewhere near its growth rate, at a reasonable valuation, then we will buy the stock. It is both a business test and a reasonable test. We have found what is important is the CEO and what the company does. When we find companies that have great CEOs, sell at reasonable prices and are growing rapidly, they are good candidates.

Scott: How and when is the convertible issued?

Cleveland: If it meets all these criteria and we can do a convertible debenture, so much the better. We have 70% what we call "eligible companies" which are investments in convertible bonds. We initially invest in the convertible and then convert to common as the stock moves up.

Scott: What do you think are the advantages and disadvantages of this strategy?

Cleveland: The advantage is that you will always be ready for an opportunity. The disadvantage is it is very hard to find companies with these criteria. The whole marketplace is high risk and not all of our companies will succeed.

Scott: Do you group your investments according to how quickly you think they will develop?

Cleveland: We all think things will work out very quickly human nature being what it is. However, most of the companies we have been successful in take quite a while to get going. This is a patience game here and we are very patient. We sometimes get lucky, but mostly we have to be very patient because we are ahead of Wall Street. What usually happens when we are successful, the results can be spectacular, five or ten times our money as opposed to having a stock rise 10% or 20%.

Scott: Would you tell us about your selling strategy?

Cleveland: A lot of this depends on the fundamentals; sometimes they get way ahead of themselves. Sometimes a company is doing extremely well and you have to stay with them a very long time. One technology company we still hold went from 25 cents to $4.50 very quickly, with trading huge volume, but we still hold shares in this company. We converted and sold our shares and made eight million dollars on a $200,000 investment! Our policy is to take profits over the long term.

Scott: What do you do with losers?

Cleveland: We write them off or sell them. You either hit a home run, or you don't. One in five of our investments is a problem child. The sooner we get out the better. We have a whole line of defense here. We do whatever we have to do.

Scott: Has the weakness in the NASDAQ average hurt you in the last 12 months?

Cleveland: We have done considerably better than NASDAQ but are not immune from market action. Our peer is the Russell 2000 Index. Last year, we beat all the indices with a 20% increase, even though the Russell 2000 was the strongest average. The main difference we have from other funds is we are company specific. The performance of our companies is not related to what any of these indexes do. I won't blame the economy or the stock market; it is how well these companies execute their plans. We have twenty companies in the portfolio, but some big gains will come from five or six companies. I only need to have two or three that do well for us to have a great year. We try to make the most money for the least amount of risk. We balance our portfolio with convertibles for a better risk/reward. In this fund, you have a good chance of making above average gains with probably less risk than in a common stock fund.

Note: None of the information contained herein should be construed as an offer to buy or sell securities or as recommendations. Performance results shown should under no circumstances be construed as an indication of future performance. Data, while obtained from sources we believe is reliable, cannot be guaranteed.

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